Though Subbarao remained tight-lipped about what transpired in the meeting, the key issue was the 150- to 200-basis point cut in key bank rates proposed by the Centre to ease access to credit and pre-empt a further slowdown in economic activity. The rapid fall in inflation in recent weeks to 6.64% creates headroom for the Centre to signal lower interest rates.
With the economy growing below potential and inflation on its way down, there is a scope for further monetary action, Planning Commission deputy chairperson Montek Singh Ahluwalia reiterated.
Ahluwalia also hinted that the second stimulus package, which could be announced in a few days, would lay greater emphasis on monetary rather that fiscal steps. We have proposed a stimulus package for this year and next year. Barring this, we are not proposing any new expenditure for this fiscal, he said.
Meanwhile, the reduction in key rates by RBI in early December, in tandem with the fiscal package unveiled by the PM, has finally started taking effect with several banks announcing interest rate cuts. ICICI bank CEO & MD KV Kamath said on Monday the bank was planning to cut interest rates very early in January. He said the extent of the rate cut was being calibrated.
Punjab National Bank, the second-largest state-owned lender, slashed its benchmark lending rate by 50 bps, from 12.5% to 12%, while Dena Bank has reduced its rates by 75 bps to 12.75% from 13.50%. The rate cuts by both banks will be effective from January 1, along with those announced earlier by SBI and BoB. HDFC too has cut its lending rates.
In response to the moves, banking industry shares were among the major gainers at the stock exchanges. Bank shares recouped early losses on expectation of further rate cuts by RBI and healthy October-December results. Frontline shares also recovered on speculation that the government would announce another stimulus package for the economy early this week. ICICI Bank ended up over 5% at Rs 442.20 and SBI rose 2.5% at Rs 1,274.
Speaking about the rate outlook PNB CMD KC Chakrabarty said, I expect the apex bank to go for a policy rate cut within the range of 50-100 bps. Dena Bank chief PL Goirala also expected an RBI policy rate cut. On inflation, he said it would be around 4.5% in the near term.
In line with the lending rate cut, PNB has also reduced rates for deposits of one year to less than three years by 100 bps to 8.50% from 9.50% with effective from January 1 Chakrabarty said on Monday.
Floating housing loans and fixed-rate car loans have also been revised downward by 50 bps. The revised BPLR will be applicable to both existing and new borrowers in retail, agriculture, micro, small & medium enterprises sectors.